China’s accelerating rise in consumer defaults

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A sharp rise in Chinese consumers defaulting is the latest in a lengthening list of ailments afflicting the world’s second-largest economy. The number of people blacklisted for missing payments on everything from mortgages to business loans has risen to a record 8.54mn, from 5.7mn in early 2020.

This number still only accounts for about 1 per cent of the working-age population. But the rate of increase shows that even since China rolled back its pandemic lockdown about a year ago, rising financial distress at the individual level is contributing to stiff headwinds that are frustrating a broad recovery in consumer activity. Without energising consumer spending, China may struggle to drive sustainable economic growth — which the IMF is forecasting will slow next year to about 4.6 per cent, from 5.4 per cent this year.

This impact of these defaults is exacerbated by an unsophisticated governance regime in dire need of reform. Under current regulations, blacklisted defaulters are blocked from buying air tickets, making payments through the near-ubiquitous mobile apps Alipay and WeChat Pay, and conducting dozens of other commonplace transactions. 

At the human level, such sanctions turn defaulters economically into virtual “non-persons”, creating great difficulties in their daily lives. At a national level, they contribute to a debt crisis that is evident not only in China’s imploding property sector and local government finances but in rising credit card arrears and a surging number of property foreclosures by banks.

Since the wave of defaults is in part the result of a decade-long borrowing spree by Chinese consumers, the distress is quite likely to get worse. Household debt is estimated to have doubled as a proportion of gross domestic product to 64 per cent over the past decade.

Beijing needs to take the initiative to push through reforms that deal with defaults and bankruptcies in a more transparent and equitable way, not only for individuals but for corporations too. If it does not, it will hamper the cause of switching to a more consumer-driven growth model, as the IMF and others have advocated. Last year consumer spending contributed only about 53 per cent of China’s total GDP, against far higher levels in advanced economies such as the US and UK.

The main focus of governance reforms should be to provide pathways back to solvency for people on debt blacklists, so that they can hope to eventually resume normal economic activity. The application of individual debt relief packages and schedules for debt workouts for individuals are two ideas being suggested by Chinese experts.

But the most important reform should be to draft and implement a new law on individual bankruptcy, to complement an existing law on enterprise bankruptcy in force since 2007. Beijing can take lessons from a pilot scheme it launched in 2021 in Shenzhen which allowed local residents to file for personal bankruptcy. 

More broadly, China needs to address its favouritism towards state-owned enterprises over their smaller, privately owned cousins. State-owned corporations, especially those owned by the central government, rarely go bankrupt in China because state-owned banks are obliged to indulge their excesses.

But an officially estimated 52mn micro, small and medium-sized enterprises are solely funded by individual households. If they fall behind on their debt repayments, the banks can foreclose on their assets and blacklist the entrepreneurs that own them. The inequity in this system goes some way to explaining why China’s private sector is underperforming so starkly this year — and holding back its wider growth.